Think back a moment to 1996, when everybody started talking about the limitless frontiers the Internet offered. Web-only companies generated huge buzz, huge hopes, and huge potential. Then, by the end of the decade, the bottom fell out.
Twelve years later people are talking about Internet bubbles all over again. New tech companies are making fast, furious money and are gleefully disrupting the status quo. Ordinary people are starting businesses with almost no investment. Savvy marketers are building brands by posting videos and messages for free and then letting viewers, readers, followers, friends, and fans spread the word.
So are we in a bubble? No, says capital investor John Frankel. But we’re going to be. Right now, Frankel says, we are actually in an enormous bull market. A bubble is out there, yes, but Frankel suspects it is three, maybe four years off — and the one that will hit is not the bubble everyone thinks it is.
But here’s the important thing — this three-or-four-year lead time to Internet Bubble 2.0 will generate immense amounts of wealth. And not just for established companies, Frankel says. Talented, motivated people able to build their own names and brands will disrupt the mainstream and make a lot of money.
“You can be a 22-year-old kid sitting on the couch eating noodles and be unemployed or you can be a 22-year-old kid sitting on the couch eating noodles and be the CEO of the next big start-up,” he says. “Enormous wealth is going to be made. And enormous wealth is going to be destroyed.”
Frankel will present How to Survive and Even Gain from the Coming Internet Bubble on Tuesday, September 27, at noon at the Marriott Hanover Hotel in Whippany. Cost: $75. Visit www.vanj.com.
Frankel, who grew up in England, received his bachelor’s in mathematics, philosophy, and logic from Oxford in 1982 and went to work for Arthur Andersen. In 1986 he joined Goldman Sachs, where he spent 21 years in technology development, re-engineering, and capital markets. He established Goldman’s Cayman offshore administration business and London global custody business. He also helped re-engineer the company’s global prime brokerage business.
In 1999 Frankel started investing in early-stage companies and was drawn to technology. He was one of the earliest investors in Quigo Technologies, a search engine that was purchased by AOL in 2007 for $340 million. In 2008 he left Goldman to join ff Venture Capital in New York, where he is a partner.
#b#Convergence#/b#. About 12 years ago there was a lot of talk about how Internet technologies were going to change the future. Someday, said tech prognosticators, it would seem ridiculous to send trucks in to clear out huge swaths of forest in order to grind paper into pulp and make books out of them — then put them on more trucks to deliver them. Someday soon, they said, people will be able to hold a device in their hands and read books that have been created, distributed, and purchased electronically.
There also were radical ideas about small devices that could store entire record collections and still have room for thousands of songs; websites onto which regular people could deposit videos of themselves; computer-mounted cameras that could transform your PC into a video telephone.
The trouble 12 years ago, says Frankel, is that the technology had not yet advanced to make such ideas possible. People thought at the time that the Internet would crush brick-and-mortar retail outlets by allowing people to shop online from their living rooms. This, says Frankel, led to massive amounts of computer infrastructure and rapid technological advances. And though individual companies, such as Pets.com, went bust, the technology and infrastructure created because of the Internet goldrush was now firmly in place. Bandwidth expanded exponentially; fiber optics networks were extended and upgraded. Everything lay in wait for new direction.
#b#Bull market#/b#. With the foundation in place, the technology platforms and devices of today — the Kindle, the iPhone, Skype, Twitter, Netflix — were able to mature. Tech companies, says Frankel, took the groundwork and changed the Internet from a virtual shopping mall to something everyday people could use for personal and business enterprises.
In digital years, the conversion took a long time. Ideas for outlets such as apps or smartphones or “the cloud,” which allows ambitious people to use Google for their E-mail, office software, and other business applications from anywhere, were first mentioned in earnest about a decade ago. It just takes time, Frankel says, for such technologies to mature enough to reach the mainstream market.
But it just so happens that all these technologies are maturing at the same time. This, Frankel says, is what he means by the phrase “disruptive technologies.” The ability to run a virtual business for free, to advertise, promote, and interact for free represents an immense shift in the paradigm. It is similar, Frankel says, to the agricultural revolution, when human labor was replaced by machines that could pick, pack, and fertilize crops more efficiently. Some farms went under, but once things settled, the industry was able to grow and distribute far more food than before.
#b#Bieber and Borders#/b#. An old business fable suggests that had Union Pacific realized that it was in the transportation business instead of the train business the company would have made a killing when air travel came along.
Union Pacific held on and found a new direction in commercial rail, but Frankel sees similarities happening right now, thanks to the Internet. Borders Books & Music, he says, is a perfect example of a company that thought it was in product sales, rather than in entertainment. The company went under last year after rigidly adhering to the idea that printed books and CDs were still king.
Barnes & Noble, however, took a page from Amazon.com and went digital. Amazon’s largest competitor by far is Barnes & Noble, which rolled out its Nook to meet Amazon’s Kindle a few years ago. Computerized creation and delivery of books, says Frankel, started slowly, but has become a phenomenon. Major publishing houses, once quick to snicker at self-publishers, are scrambling to cash in on the billions of dollars independent authors are making without them.
Businesses could also learn a lesson from Justin Bieber, Frankel says. Bieber, who was barely a teenager when he became a household name, made his name not by getting a major record label to back him, but by using YouTube to promote himself. “Here was a kid with talent and he made an audience for that talent,” Frankel says. Bieber parlayed his talent into thousands of fans and followers — and then was signed to a major label because of it.
#b#Bubbles#/b#. The exuberance with which everyday people have embraced social media sites, Google apps, and other things unheard of half a decade ago has set pundits’ tongues wagging. Frankel admits that the optimism of right now echoes those being heard around 1997. But he disagrees on how it will play out.
The popular perception among those who foresee an Internet bubble popping is that people will get bored of their online toys. Some worry about the example MySpace offers. Essentially the first social media site embraced by the mainstream only a few years ago, MySpace was crushed when people traded in their pages for ones on Facebook. The company that Rupert Murdoch bought for $585 million in 2005 was sold earlier this year for $100 million.
Losses like MySpace’s have some afraid that Twitter, Facebook, Digg, and all the rest will suffer a similar fate, perhaps all at once. And Frankel agrees that these sites eventually will lead to other things. “Everything is a fad,” he says. “Telex was a fad. E-mail, hopefully, will be a fad. Twitter one day will be a fad.”
But the ability to use technology for social and business purposes will be there. “We didn’t stop using whale oil because we ran out of whales,” Frankel says. “Something better came along. New technologies come along all the time.” When something better than Twitter (which Frankel says “is still massively underrated”) comes along, he says, people will embrace it. So there is no bubble there.
Where there is a bubble looming, he says, is in personal investment. Remember, the first Internet bubble did not unseat the Internet. It simply created victims of specific companies. People who invested in Webvan (a grocery delivery website) or eToys lost big, but those who invested in technology companies that would later provide the foundation for information delivery or easy-to-use online features held on and are now making huge returns.
In three or four years, Frankel says, when everyday people will be investing in the next-big-thing startup, the limits will show themselves and there will be major casualties. But the survivors will be able to look at the aftermath and realize where the next direction will be.
So, with the knowledge that an Internet bubble is imminent, is there any way to stop it? “No, bubbles can’t be stopped,” Frankel says. “People don’t believe it. But I don’t know that they should be stopped.” Like a purging forest fire, there will be destruction, but in the long run, fire paves the way for new growth. This, says Frankel, will be the legacy of the boom and bust cycle this time around.
#b#Boom#/b#. Frankel, a longtime technology investor, sees a lot of money being pumped into ideas every investor is hoping will be the next Twitter. He is already invested in the one that just might be it — Klout.
Klout.com measures influence. It charts how active and influential individuals are across various social media platforms and crafts a score. This score tells potential followers whether you are worth following on Twitter or friending on Facebook. At first dismissed as little more than a useless statistic, Klout has now garnered 100 million users and, Frankel says, is fast becoming the metric people use to get a snapshot of how “for real” someone actually is.
“Google started a revolution by page-ranking the web,” Frankel says. “Klout is starting a revolution by ranking people.” A Klout score of 50-to-55 puts someone among the best influencers. Frankel’s score is 60. And, by the way, the name of Frankel’s company, ff Venture Capital, is a shrewd play on the Twitter hashtag #ff — an abbreviation tweeters use to denote “forward Fridays” or “follow Fridays” in order to draw attention to other Twitter users.
Klout is far from the only tech company in which Frankel and ff are invested. Frankel is the director of 500px, an online photo portfolio site; Infochimps, which sells data sets from music to crosswords; Phone.com, a virtual phone answering service for businesses, and six other technology companies.
Will any or all of these companies become tomorrow’s household names? Frankel doesn’t know. All he knows is that now is the time to invest, he says. Tech is booming and it will stay booming for at least a few more years. Until that changes, he says, early-stage investment is where he most trusts his money to be.